Regulation
What is missing from MiCA’s complete cryptographic manifesto?
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In April 2023, the European Union put in place comprehensive legislation to finally reign in the crypto and blockchain industry. Regulation of crypto-asset markets (MiCA) is a bold and pioneering initiative to bring a unified regulatory framework to the industry and establish clearer laws for crypto asset service providers and token issuers.
Considered a milestone in the cryptocurrency regulatory landscape, MiCA recently approved a provision to address stablecoinswhich have long been considered complicated assets to regulate due to their unclear classification and common use in cross-border transactions. Following the approved provision, Circle, the issuer of the USDC stablecoin, has become the first stablecoin issuer be officially recognized as compliant with EU crypto legislation.
Circle’s new status has led many to consider the implications of MiCA on the $160 billion the global stablecoin supply as well as the broader crypto and Web3 economy.
While the idea behind the most thoroughgoing attempt at regulating cryptocurrencies is to protect investors by placing liability on the organizations that issue digital assets and provide services, onboarding new users and fostering innovation while ensuring competition, it will take some time to assess its full impact.
The idea for MiCA was born out of a wave of ICOs in 2017 and 2018 that raised concerns about scams, fraud and other manipulations that could jeopardize financial stability within the European bloc. After years of research, due diligence and good intentions, MiCA deserves much credit for its approach to balancing regulation and innovation, a clear recognition of the technological and commercial benefits of crypto and blockchain. Furthermore, MiCA enhances stability, investor confidence, transparency and oversight through its comprehensive legal framework.
But MiCA has some blind spots.
While the regulatory framework recognizes the importance of bridging the gap between crypto asset service providers and traditional finance, it offers little guidance on how to make this happen. Indeed, the growing overlap between digital assets and financial assets bodes well for driving adoption and has likely contributed to the maturation of the crypto ecosystem, but MiCA imposes limits on stablecoins that seem counterproductive.
Non-euro pegged stablecoins are not allowed to be used in transactions for goods and services and are subject to daily limitations on the number of transactions (up to one million) and their total value (€200 million). This essentially imposes usage limits on USDC and USDTthe two major stablecoins, even though they are certified as MiCA compliant.
And because stablecoins are so crucial to facilitating transactions, enabling DeFi, and driving nearly every aspect of the industry, these restrictions could potentially impact liquidity and disrupt DeFi innovation and activity, undermining a core pillar of MiCA’s mission.
Moreover, these limitations are compounded by the fact that MiCA does not focus on interoperability, one of the most pressing needs in the industry, nor does it seem interested in encouraging crypto-to-fiat payment solutions, key avenues for strengthening liquidity and sparking innovation that extends beyond crypto.
While it is too early to understand how MiCA’s stablecoin approach will play out, European regulators can do more to address interoperability and cross-ecosystem payments to future-proof its economy and avoid market fragmentation. This can be improved by working with EU organisations like Horizon Europe and the European Innovation Council to find innovative startups that tackle areas neglected by MiCA.
For example, Kima, an asset-agnostic peer-to-peer money transfer and payment protocol, provides an interoperable settlement layer for cross-chain and crypto-to-fiat transactions. By removing barriers between blockchains and between traditional financial instruments and blockchain networks or decentralized applications, Kima’s protocol allows developers to access larger amounts of liquidity. It also benefits non-crypto native users and financial institutions by allowing funds to flow in all directions.
MiCA will undoubtedly serve as a standard-bearer for cryptocurrency regulation, guiding other nations and economic blocs on how to regulate a burgeoning, complex, and volatile market that offers much promise. It is important that in its legitimate desire to protect its monetary interests, it does not overlook other areas that impact the sector’s ability to grow.
The EU has shown its willingness to adapt and study trends as they emerge, and in the rapidly evolving world of crypto, this is necessary to ensure that appropriate measures are taken to protect investors as well as the integrity of the entire industry.